Treasury & IRS Guidance on Tip and Overtime Deductions for Tax Year 2025
The Department of the Treasury and the Internal Revenue Service have issued Notice 2025-69, providing detailed guidance to workers who received tips or overtime during the 2025 tax year. These rules stem from the tax provisions enacted under the One, Big, Beautiful Bill and apply to tax years 2025 through 2028.
1. Deduction for Qualified Tips
Workers may deduct qualified tips up to $25,000 annually, with phase‑outs beginning at:
$150,000 modified adjusted gross income (MAGI) for single filers, or
$300,000 MAGI for joint filers.
This deduction is intended to provide relief to employees in service industries where tipping is customary. Workers may rely on several sources to determine their tip amount:
Tips reported on Form W‑2, Box 7,
Employer‑reported tip records (e.g., Forms 4070),
Form 4137 amounts for unreported tips, or
Contemporaneous records such as logs or point‑of‑sale receipts.
The IRS guidance clarifies that no separate informational reporting will appear on W‑2 or 1099 forms for tax year 2025. Taxpayers must calculate the allowable amount based on existing documentation.
2. Deduction for Qualified Overtime Compensation
Individuals receiving overtime may deduct the Fair Labor Standards Act (FLSA) premium portion of their overtime wages—the component above their regular hourly rate.
The deduction is capped at:
$12,500 per taxpayer, or
$25,000 for joint filers, with phase‑outs beginning at the same $150,000 / $300,000 MAGI thresholds.
The guidance outlines how to compute the qualifying portion when pay statements report:
Overtime premiums separately,
Blended or aggregated overtime totals, or
Enhanced overtime rates (e.g., double‑time).
In simplified form, when overtime is paid as a lump sum, the FLSA premium may often be calculated by dividing the total overtime compensation by a factor (e.g., 3 or 4), depending on pay structure.
This deduction is available to both itemizing and non‑itemizing taxpayers.
3. Recordkeeping and Compliance
Because 2025 informational returns will not segregate tip or premium overtime amounts, workers must retain supporting documentation. Examples include:
Pay stubs and payroll statements,
Tip logs (digital or written),
Employer records of reported tips,
Forms 4137 for unreported tips,
1099‑K or third-party settlement organization statements for self‑employed workers.
Proper substantiation is essential to avoid errors and ensure accurate claim of deductions.
4. Practical Considerations
Self‑employed workers: Can use contemporaneous records to identify qualified tip amounts.
Non‑exempt employees under FLSA: May claim the premium portion of overtime.
Exempt occupations or alternative pay structures: May require additional analysis.
Notice 2025‑69 includes extensive examples illustrating these scenarios.
Summary
The new deductions for tips and overtime offer meaningful tax relief for millions of workers. However, calculating the eligible amount requires careful review of payroll records and IRS guidance.
If you receive tips or overtime and wish to understand your eligibility or documentation requirements, Braden CPA can assist with review, calculation, and tax preparation.
Braden CPA — Guiding you through the numbers with accuracy and clarity.